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Luxury tax in India

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Publish Date: July 03rd, 2019

By: Sandhya Kannan, Head – Content

Even a few years back your hotel bill would show a charge under the category of ‘luxury tax’. But you won’t find any such term in such receipts these days. The introduction of goods and services tax (GST) in 2017 has changed the landscape of the Indian indirect taxation system. It has subsumed luxury tax and many other types of taxes.

Earlier, luxury tax in India was considered an indirect statutory tax levied on luxury services. Services available at hotels, resorts, and spas were subject to this tax. It was applicable on services other than food and beverages at these places.

Now, ‘luxury tax’ and other ‘extras’ section of your bill has been replaced by GST. So, the name may have changed, but the levy remains.

Let us take a detailed look at the history of luxury tax in India and its present state.

What is a luxury tax?

When you have to cough up anything extra in excess of the actual price, it can be a bother. It’s not nice to see extra figures added to the actual room tariff at the time of checking out. ‘Luxury’ is defined as a service or commodity used for enhancing comfort, enjoyment or pleasure. But irrespective of your experience in the hotel, the charges for ‘luxury' availed have to be paid.

It’s interesting that such 'luxury' refers to only the room you live in or the total staying charges. Neither the food and beverages nor any special service charges are eligible to be brought under this category. In other words, only the lodging is taxed.

Earlier, luxury tax was not directly under the central government. It differed from state to state.

The concept of luxury has always been challenging in the Indian taxation framework. It’s subjective and relative. After all, one's necessity can be another's luxury. The advent of GST, however, has put ‘luxury items’ in the highest tax bracket at 28%.

Related:How to claim Tax Benefits under Section 54F

Where is luxury tax applicable?

Luxury tax is imposed on luxury items or goods. Services also come under the purview of this type tax. How do you define luxury items? It’s pretty simple actually—they are those items that are not considered essential. Luxury cars, jewellery, high-priced hotel rooms are things that provide luxury to the consumer. These come under the scope of luxury tax. Restaurants, spas, and resorts charge taxes on the services provided. Under the old tax system, the tax rates for these services used to differ from one state to another. Under the GST, however, the rates have become standard across the country. They come under different tax slabs according to different prices. This makes the use of goods and services under certain price slabs even more expensive.

The following are some of the services that come within the definition of luxury:

1. Payments for enjoying the services provided by a club. Deposits, membership fees, donations, or any other associated expenses.

2. Lodging facilities provided by hotels/resorts in exchange of a specific daily tariff

3. Services enjoyed at spas, beauty parlours, health clubs, or swimming pools

Understanding luxury tax rate

As already iterated, luxury tax used to differ from state to state. For example, the following rates were applicable in Goa:

The following are some of the services that come within the definition of luxury:

1. Room rates below Rs 500 per night: exempted from tax.

2. Room rates between Rs 501 and Rs 2,000 per night: 5% per annum.

3. Room rates between Rs 2,001 and Rs 5,000 per night: 8% per annum.

4. Room rates over Rs 5,001: 12% per annum.

In Karnataka, the rates were:

1. Room rates below Rs 500 per night: exempted from tax.

2. Room rates between Rs 501 and Rs 1,000 per night: 4% per annum.

3. Room rates between Rs 1,001 and Rs 2,000 per night: 8% per annum.

4. Room rates over Rs 2001: 12% per annum.

Every state had different slabs and different rates.

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How luxury tax is included in GST

GST came into effect all over India on the 1 July, 2017 as a destination-based tax system. Its principal goal was to bring all indirect taxes under one umbrella. It subsumed almost all types of indirect taxes.

Luxury goods and services include hotels, lodging houses, resorts, and conference or banquet halls. But GST on luxury services is not limited to them. It is also applicable to clubs that provide lodging facilities on their premises.

GST has different tax slabs for hotels and restaurants depending on the revenue. It also differentiates between air-conditioned and ordinary properties. So, customers pay more depending on the class of restaurant. The tax slabs for three-star hotels and five-star hotels would also be different.

The following is the luxury tax rate list for hotels:

Tax rates for hotels -

GST rates for restaurants and food services are given in the following:

1. 5% at restaurants of all standards and categories.

2. 5% at restaurants (including room service and takeaway services at hotels with room rates less than Rs 7,500).

3. 5% on any food and non-alcoholic drink served at any cafeteria, or canteen, or mess on a contract basis at any institution.

4. 5% on food provided by the Indian Railways Catering and Tourism Corporation (IRCTC) / Indian Railways or their licensees both on railway platforms and inside trains.

5. 18% at restaurants (including room service and takeaway services at hotels with room rates more than Rs 7,500).

6. 18% on food, including takeaway services, provided by a restaurant inside a club, guest house, or any similar body.

7. 18% on all outdoor catering services.

Luxury tax returns and returns filing

Before the introduction of GST, many indirect taxes were not uniform in India. Every state had its own laws and systems. Like all commercial taxes, luxury tax returns would also be filed either on a monthly or quarterly basis. GST has streamlined and standardised the entire process. The dates and procedure of filing GST across industries and across the country are the same.

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